Investing in companies at the forefront of AI

AI is a rapidly growing field with revolutionary potential—and risks

Artificial intelligence (AI) is one of the biggest, buzziest terms of 2023. Analysts tracking data from Google searches noted that, as of June, interest in the term "AI" was at an "all-time high.”

Your clients may have performed one of those searches.

Just a few years ago, AI may have been considered more of a “niche” tech industry investment, last year’s November release of the consumer-facing ChatGPT and the subsequent proliferation of consumer-based AI tools has brought AI into the public eye.

Investment in AI is growing

There are a growing number of companies investing heavily in AI research and development. An Accenture survey shows that 63% of organizations are now prioritizing AI over all other digital technologies. A McKinsey survey shows similar interest: More than half of companies are investing more than 5% of their digital budgets in AI, with 63% saying they expect their investment to increase over the next three years.

"...63% of organizations are now prioritizing AI over all other digital technologies."

Companies that are at the forefront of AI, such as Nvidia, are seeing their stock prices soar. Global spending on AI-centric systems reached nearly $118 billion in 2022 and is expected to surpass $300 billion in 2026. Earlier this year, Microsoft invested $10 billion in OpenAI, creator of ChatGPT.

The growing importance of AI is also creating new opportunities for investors who do not want to be left behind and are looking to get ahead of the curve by investing in companies that are developing AI technologies. Retail investors purchased almost $1.5 billion in U.S. stocks on May 30 and 31, the highest daily figure in three months—most of those in tech, and buoyed by an growing interest in AI.

While experts, including Reid Hoffman, a venture capitalist who was a co-founder of LinkedIn, are worried about the potential risks of AI, Hoffman says he is still optimistic about its potential benefits and is investing in companies that are developing these technologies.

Multiple ways to invest

There are many different types of, and approaches to, AI technology, and not all companies are using the same technologies. There are multiple ways to invest in the AI space: directly in companies that develop AI, in companies that will benefit from the wider adoption of AI, or in industries that could benefit from a potential shift in workforce disruption. There are also many companies that are part of the larger AI ecosystem such as robotics developers, semiconductor companies, cybersecurity, data processing, or chip manufacturers.

Investors could also consider ETFs (exchange-traded funds) that invest in a basket of AI-related companies, with some of the AI ETFs outperforming the S&P 500 over the past year.

As with any investment, investors should do their research before jumping in and consider AI as just part of their diversified portfolio that’s aligned with their risk tolerance, time horizon, and goals.

Potential upside:

• High growth potential: AI is a rapidly growing field, and the market for AI-powered products and services is expected to continue to grow in the years to come. This growth could lead to signigficant returns for investors who invest in AI-related companies. Some analysts say that the global AI market is expected to pass $1 trillion (with a "t"!) by 2028, up from a paltry $95 billion in 2021.
• Diversification of a portfolio and the economy: For investors looking at individual stocks, some analysts consider investing in AI-related companies could make sense for a diversified portfolio. Investing in rapidly growing AI could yield substantial returns as the “new industry” of AI diversifies the current economy.
• Opportunity for innovation: AI is a disruptive technology that has the potential to revolutionize many industries, including those having social impact. Investors who invest in AI-related companies could be positioned to benefit from these innovations.

Potential risks:

• Early-stage technology and a fragmented market: AI is a rapidly evolving field, and there is no guarantee that any one company will be successful, particularly as there are many different companies developing many different AI products and services. Some VC investors say that, like the dot-com bubble, a potential 85% of AI startups will be out of business in three years. AI is a new and untested technology, and there is no guarantee that it will be successful, with analysts pointing to the volatility and price fluctuations in the market. Many have drawn parallels to the dot-com bubble and crash.
• Regulation could slow down growth: Governments around the world are beginning to address the need to regulate AI. Sam Altman, CEO of OpenAI, urged Congress to consider regulating AI during his Senate testimony on May 16, 2023. “I do think some regulation would be quite wise on this topic,” he said. He also noted how regulations could slow the adoption of AI and make it more difficult for companies to succeed, particularly smaller startups. “We don’t want to slow down smaller startups. But [we want to leave] space for new ideas and new companies and independent researchers to do their work and not [put on] a regulatory burden” that a smaller company couldn’t handle, he said.
• Competition makes it hard to differentiate and turn a profit: AI startups are on the rise, supplanting crypto in terms of founders and funding. The number of U.S. AI companies has doubled from 2017 to 2022. With this much competition, it can be difficult for companies to maintain a competitive advantage and return profits.

A diversified portfolio

Investors may be very keen to invest in this new, “buzzy” technology—and may even have some FOMO (fear of missing out) on the AI wave. A lack of technical knowledge should not hold anyone back from learning more. A deep understanding of the technology is not as important as having a basic understanding of the business as a business and how will it differentiate itself in a crowded market to make a profit.

As with any investment, financial professionals should understand what the client’s goals are and provide options to help them diversify their investment portfolio by company size and industry—particularly with a technology in such early stages and use.